Says what, exactly...?
TWENTY-FIVE basis points, writes Brian Maher at The Daily Reckoning.
The Federal Reserve elevated its target rate 25 basis points yesterday.
That rate squats presently between 5% and 5.25% – the highest level since September 2007.
Here is the question spilling from every pair of lips: Was that the final rate hike?
Will Mr.Powell scratch Wall Street's belly...and caress its gills...by 'pausing'?
Markets presently give 90.4% odds that the Federal Reserve will sit upon its hands next month – no hiking – no cutting.
Yet the same markets have trained their spyglasses on the farther horizon. And they spot rate cuts by year's end.
Markets presently give 0.4% odds that today's 5-5.25% rate will dangle in place through December – just 0.4%!
The consensus vision presents a December target rate between 4.25% and 4.50%. That is, a 75-basis-point reduction.
The odds of this 75-basis-point reduction presently hover at 45.8%.
But what does the Federal Reserve itself say about it? It said this Wednesday:
"In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation and economic and financial developments."
That is, the Federal Reserve said very little. It is bafflegab designed to baffle. It is persiflage designed to camouflage.
It talks much – yet says little.
It is, in brief, gibberish. As well babble that next month's weather will influence your clothing selections.
Naturally it will. Yet what will be next month's weather? No answers are forthcoming.
Why then are markets so trustful that the hikings are over and that cuts are on the way?
After all, Mr.Powell perched himself atop a fence in the post-announcement press conference. There he will sit until further notice:
"A decision on a pause was not made today."
A certain Quincy Krosby is the chief global strategist at LPL Research. He affirms that:
"The statement provides a solid platform from which the Fed can move in any direction without unduly surprising markets."
Powell emptied frigid water upon the heads of the rate cut spotters:
"Inflation [is] going to come down not so quickly. It will take some time. And in that world, if that forecast is broadly right, it would not be appropriate to cut rates."
Did you catch that last bit – that it would not be appropriate to cut rates?
Perhaps that is why the Dow Jones Industrial Average shed 270 points on the day? Why the S&P 500 retreated 28 points and why the Nasdaq Composite went 55 points backward?
Yet markets give 99.6% odds that he will indeed cut rates by year's end.
They evidently do not believe that Mr.Powell's weather forecast is 'broadly right'.
Given the Federal Reserve's nearly unbroken string of dreadful weather forecasting...we hazard markets are correct.
There is tremendous justice in their skepticism.
We direct you to the bond market. It indicates the economy is in for heavy weather.
As we have noted before: Rising longer-dated Treasury yields generally indicate a high-pressure zone of plumb and balmy conditions, of azure skies.
Flush economic times are ahead.
In this bountiful time expanding businesses must compete for bank loan capital. The iron laws of supply and demand squeeze interest rates higher as the competition unfolds.
Rising yields likewise suggest a future inflation.
Declining bond yields – meantime – generally indicate the precise opposite. They indicate a low-pressure system is tracking in, that economic weather is approaching.
They likewise indicate the absence of future inflation. Bondholders are not demanding a premium to keep them jogging ahead of inflation.
They are willing to accept lower yields because they do not believe inflation will reduce their bonds to sawdust assets.
And so we ask: In which direction are bond yields presently running? Here is the answer:
The 10-year Treasury yield has fallen into swift retreat. They are hunkering in, forecasting rain.
4.07% in early March, the 10-year yield has plunged to a present 3.40%.
Such a mighty plummet in so short a stretch represents – in Jim Rickards' telling – 'an earthquake in bondland.'
We recently cited Graham Summers of Phoenix Capital Research. Today we repeat the citing:
"The bond market is signaling something 'BAD' is coming.
"Bond yields rose throughout late 2021-early 2023 on fears of inflation. But once Silicon Valley Bank imploded, yields dropped rapidly: Historically investors pile into Treasuries as a 'safety trade' whenever things get hairy in the financial system. The regional banking crisis in mid-March was no exception with yields collapsing at their fastest rate since the 1987 crash.
"When this happened, I began to wonder...would yields begin to rise again as things normalized following the regional banking bailouts...or would the economy roll over and yields finally start to plunge as a recession took hold?"
We now have our answer...
"[Falling yields are] a signal that something 'BAD' is brewing in the economy/financial system. If everything was fine, yields would be rising again based on hopes of growth and fears of inflation."
Put simply, the fact yields are falling like this tells us that the bond market fears something far worse than inflation is coming...
Yet what precisely? We offered no answer when we posted these comments last month. Nor do we offer answers today.
Yet as we noted last month: Small businesses nationwide are presently filing bankruptcy claims at the fastest gait since the pandemic terrors of 2020.
We note further that the technology sector is heaving employees overboard at the greatest rate since the 2001 'dot-com' calamities.
Perhaps we are witnessing a drastic lowering of the barometric pressure. Perhaps we are witnessing the formation of a very low-pressure system.
We simply do not know.
Yet we note that the first-quarter gross domestic product 'expanded' at a weak and wan 1.1%, annualized.
This represents a receding from the 2.6% economic expansion of the previous quarter.
Now we invite you to extend the extrapolation to the coming quarters. And we must consider the squalling rains that have descended upon the banking sector.
First Republic Bank, now dead, now buried, represents the second-largest bank failure in the long history of American banking.
Some six banks have died the death since March – including the behemoth Credit Suisse. The buzzard Union Bank of Switzerland, known now as UBS, presently scavenges upon its remains.
Thus lending standards are undergoing a clamping. Credit is stingy.
For an economy thoroughly and uncompromisingly dependent upon the expansion of credit, this represents an ill omen.
That is why we believe markets are correct – and why the chairman of the Federal Reserve system is incorrect.
Deteriorating conditions will direct him to the straightabout. We hazard he will lower his target rate by year's end.
It is also why we are readying our foul weather gear.